Upgrades Citing a “reasonable valuation, increasing M&A potential and recession resistant characteristics,” Stifel’s Martin Landry upgraded Alimentation Couche-Tard Inc. ( ATD-T) to a “buy” recommendation from “hold”, declaring it “continues to impress with unabated earnings growth.”
He was one of two equity analysts on the Street to raise their recommendations for the Quebec-based convenience store operator on Thursday in response to its first-quarter 2023 financial results, released after the bell on Tuesday.
“In the last four years, ATD’s EPS increased at a CAGR [compound annual growth rate] of 18 per cent while improving its balance sheet,” said Mr. Landry in a note. “ATD’s leverage ratio of 1.3 times is much lower than 2.9 times four years ago and provides management with ample flexibility. We note that Couche-Tard has not repurchased any shares since June 30th despite having room under its authorized NCIB, This could suggest an acquisition is in the works.
“Overall we believe that ATD is well positioned to navigate a potential economic slowdown as convenience items are affordable treats with recession proof characteristics. We expect strong year-over-year earnings per share of 38 per cent in Q2/FY23 boosted again by gasoline margins.”
On the M&A front, Mr. Landry said Couche-Tard’s management is seeing “good deal” flow in North American and “expects to benefit from the economic outlook uncertainty, which could create some acquisition opportunities.”
“The IPO market is somewhat closed currently, removing an option for potential sellers,” he added. “In addition, the high yield debt market is challenge, removing a potential source of financing for buyers. These market dynamics favour Couche-Tard, which has $2.2-billion in cash and access to $2.5-billion from its revolver credit facility.”
Pointing to “the improved M&A outlook, investors’ increased focus on quality and liquidity and recession resistant characteristics of the convenience channel,” Mr. Landry increased his valuation multiple for Couche-Tard, leading him to increase his target for its shares to $65 from $57. The average target on the Street is $67.57, according to Refinitiv data.
Elsewhere, as its “strategic drivers gain traction,” National Bank Financial’s Vishal Shreedhar raised the stock to “outperform” from “sector perform” with a $68 target, up from $63.
“We are upgrading our recommendation given: (1) Increasing confidence that ATD’s fuel margins will continue to show strength owing to ongoing improvement initiatives. (2) Improved likelihood of an acquisition given management’s comments on higher deal flow as well as an unexpected pause in repurchasing shares. (3) An accommodative valuation as ATD is trading below historical averages. ATD trades at 15.5 times NTM EPS [next 12-month earnings per share] versus the 5-year average of 17.4 times (11-per-cent discount). It also trades at 9.8 times NTM EBITDA versus the 5-year average of 10.5 times (7-per-cent discount),” said Mr. Shreedhar.
Other analysts making target adjustments include:
* Canaccord Genuity’s Derek Dley to $65 from $61 with a “buy” rating.
“Recent price increases should be supportive of margin growth over the course of our forecast period, while fuel margins over the medium term appear to be sustainable above the 30 cents per gallon level. Furthermore, while we have not incorporated share buybacks into our estimate, we expect the company to be active with its NCIB over the next 12 months,” said Mr. Dley.
* Scotia Capital’s Patricia Baker to $73 from $66 with a “sector outperform” rating.